PAKISTAN’S ongoing economic crisis is multifaceted. At one end, the government must pursue stabilisation policies to contain its burgeoning fiscal deficit for debt sustainability amid increasing political polarisation; at the other end, it has to tackle external liquidity and funding challenges. That is what global rating agencies have sought to highlight in their comments on budget 2025. In its latest note on the budget, Fitch has commented that the tax-heavy budget will help Islamabad access fresh IMF funding, narrow its deficit, and reduce external pressures. But this stabilisation will be achieved “at a cost to growth ... despite some improvements in short-term indicators of economic activity”. Nevertheless, Fitch’s growth projection of 3pc for FY25 is still more optimistic than the 2.3pc estimated by the World Bank’s Global Economic Prospects report. Fitch is also uncertain about the government’s capability to meet its fiscal targets; it expects the ambitious revenue generation to fall short of and current expenditure to overshoot budget targets. “Our updated fiscal forecasts assume partial implementation and project a primary surplus of 0.8pc [against the budgeted 2pc on wide-ranging tax increases] of GDP on shortfalls in revenue generation and an overshoot in current spending, partly offset by under-execution in development spending,” it says. On a positive note, it anticipates economic growth and primary surpluses gradually driving down the debt-to-GDP ratio. It also expects a decline in inflation and interest costs next year.

The economic slowdown induced by the stabilisation measures apart, Fitch has described “external liquidity and funding as still Pakistan’s key credit challenges”. Pakistan may secure a new IMF deal, sustaining the tight policy settings necessary to keep external financing needs in check. But complying with IMF demands could become “increasingly challenging”, with projected funding needs at about $20bn, including maturing bilateral debt that will continue to be rolled over. “This leaves Pakistan exposed to external funding conditions and policy missteps. Pakistan’s ‘CCC’ rating reflects high external funding risks amid elevated medium-term financing requirements,” it adds. This is in line with Moody’s assertion that our weak debt affordability drives high debt sustainability risks as the government spends over half its revenues on interest payments. If anything, the two agencies emphasise that the government’s ability to sustain reform implementation will be key to meeting budget targets and unlocking the external financing necessary for easing liquidity risks stymieing growth.

Published in Dawn, June 20th, 2024